Your most valuable employee could be the reason a buyer walks away, even if that employee has done nothing wrong.

In one proposed sale Wood Stabell Law Group represented, the business was profitable, well run, and had a purchase price of approximately $2 million.

But one employee was critical to its success. As the buyer looked more closely, that dependency became a concern the business couldn’t resolve.

What happens if they leave?

The company operated in a rural community. Replacing this employee would mean finding someone with the right skills who was also willing to relocate, which wouldn’t be easy.

The owner had never entered into an employment agreement with the employee. He hadn’t thought it mattered.

During due diligence, the buyer began asking what would happen if that person left. Could someone else step in? How difficult would it be to find a replacement?

Then another concern emerged.

The buyer was a private equity firm, and the employee made it clear he didn’t want to work for private equity. He hadn’t threatened to leave. He simply had different plans for his future.

The buyer decided the risk was too great. The acquisition never closed.

A few months later, the employee left and started his own business.

The concern goes beyond an employment agreement

If your business has someone you can’t imagine operating without, you probably appreciate everything they contribute.

A buyer may appreciate that contribution, too. But they also need to understand how the business would function without that person.

In this transaction, the concern went beyond a missing agreement. Too much knowledge, too many relationships, and too much operational expertise depended on one employee.

The buyer needed an answer to a practical question: what happens if this person isn’t here six months after closing?

When your answer is “we’re not sure,” that uncertainty can affect how a buyer evaluates the entire business.

Give your business a plan B

Employment agreements, retention bonuses, succession planning, and cross-training can all play a role in reducing uncertainty.

The broader goal is to build a business where knowledge, relationships, and leadership can survive a change in personnel.

Before you’re preparing for a sale, ask yourself:

• What does only one person know how to do?
• Which important relationships depend on that person?
• Who could take over if they left?
• How difficult would replacing them actually be?

Those questions are easier to address while you still have time to prepare.

Due diligence doesn’t create problems. It reveals them. Understanding where your business depends on one person gives you an opportunity to strengthen it before a buyer raises the concern.

Where might your business need a plan B? Download our complimentary Deal Readiness Checklist to start identifying risks before buyers do.

The information provided in this article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by virtue of this article. For specific legal advice related to your situation, please consult with a qualified attorney.